The Austrian School

Habsburg Coat of Arms

The "Austrian School" (also known as the "Vienna School") emerged around one of the pioneers of the 1871 Marginalist Revolution, Carl Menger at the University of Vienna.   The "First" Generation of the Austrian School was composed of a pair Austrian professors who, although not directly students of Menger, were nonetheless heavily influenced by him: Friedrich von Wieser and Eugen von Böhm-Bawerk.   It was they who, for the most part, spread the Austrian School gospel throughout the Austro-Hungarian Empire and trained the next two generations. These later generations were dominated by the figures of Ludwig von Mises and Friedrich von Hayek, with Joseph Schumpeter having departed rather early for more Walrasian pastures. The Austrian School maintained its base in Vienna until the 1930s, when most of its members moved or were exiled to Great Britain and the United States. 

Already in Wieser and Böhm-Bawerk, we find the principal features of Austrian School economics, many of which became clearer and more distinctive in the hands of their students, particularly Mises and Hayek.  These can be generally enumerated as follows (with a note, in parenthesis, on their main disputants):

Some may wish to underline other quintessentially Austrian characteristics, but the listed features seem to capture their more important contributions. As we can see from this list, throughout much of its history, the Austrian School has been in recurrent and continuous engagement in numerous debates with other schools of economic theory over a wide assortment of issues.  This "abrasive" nature of the Austrian School ensured that it would be kept out of mainstream (read "Anglo-American") economics but it was also the glue that held the school together and forced it to solidify its distinctive theoretical ideas.  However, we should also remind ourselves that several Austrian insights, such as certain aspects of their theory of knowledge, imputation, capital, free goods, etc., have made their way into conventional economics, although often separated from the rest of their work and thus "watered down".

After the 1871 presentation of his revolutionary subjective theory of value, Carl Menger was challenged by Gustav Schmoller and the recurrent debate on method (methodenstreit) which ensued between them and their followers divided the German-speaking world neatly: Austria and its universities for the Austrian School; Germany and its universities for the German Historical School.  

Soon afterwards, the next great contributions of the Austrian School were made: Friedrich von Wieser (1889) detailed and expanded Menger's theory of imputation in production and alternative cost, while Eugen von Böhm-Bawerk (1889) developed his own distinctive time-dependent theory of capital and interest.  Colleagues and brothers-in-law, Wieser and Böhm-Bawerk taught at various universities (Vienna, Innsbruck, Prague) and were recurrently appointed to the ministries of finance and commerce in Vienna.  As such, the pre-World War I era represents perhaps a golden age for the Austrian School, their member enjoying a professional and social prestige and influence within the Austro-Hungarian Empire that few of their marginalist contemporaries managed to achieve elsewhere.  It was during this period that the second generation, notably Ludwig von Mises and  the eclectic Joseph A. Schumpeter, were trained.

The early Austrian School  was to influence economists beyond the boundaries of the Austro-Hungarian Empire.  The alternative cost doctrine caught the fancy of Philip H. Wicksteed and Lionel Robbins in the U.K. and Herbert J. Davenport and Frank H. Knight in the United States, who used it to gleefully pound away at the Marshallian Neoclassical orthodoxy. 

The Austrian theory of capital brought even more attention: it was quickly adopted (but "Walrasianised") by  Knut Wicksell in Sweden and Irving Fisher in the United States, and ignited an early debate with several Anglo-American Neoclassicals, notably John Bates Clark.  More faithful foreign followers of the Austrian School include William T. Smart in the U.K. (who translated much of their works into English) and Frank A. Fetter in the U.S. 

Throughout the 1890s and 1910s, Böhm-Bawerk and Wieser also locked horns with the Marxian school, which was particularly well-represented in Viennese society by prominent figures such as Max Adler, Otto Bauer and Rudolf Hilferding -- the "Austro-Marxists" -- over the theory of value, capital, interest, methodology and economic policy. 

[Mention should also be made of a small Walrasian seed in contemporary Vienna -- one that includes Rudolf Auspitz and Richard Lieben in its early years and, later on, renegade students of the Austrian School such as Joseph A. Schumpeter, Karl Schlesinger and Menger's own son, Karl Menger, who ran the Vienna Colloquium in the 1930s.  However, in these early years, the Austrians never really confronted the Walrasians in their midst, largely because the differences between them were not yet clear.]

Much of this early success came to an end with the collapse of the Austro-Hungarian Empire in 1918.  In the new republican atmosphere, many Marxians and semi-Marxians (such as the German reform economists of the Kiel School) began to take positions of power in the post-war Austrian and German governments and economic institutions. The Marxians pushed much of their more pragmatic economic planning agenda in Central Europe during the immmediate post-war period.  With Böhm-Bawerk already dead, Wieser approaching death and Schumpeter enrolled by the Marxians as a half-willing accomplice, the mantle for the defense of the laissez-faire and marginalist economics fell largely upon the shoulders of Ludwig von Mises and his students. 

The Austrian School's traditional duel with the Marxians took on a new dimension when several prominent Paretians rode into the assistance of the Marxians by concurring with the possibility of an efficient socialist organization of economic society, what became known as the "Socialist Calculation" debate.  It was out of this debate that several of the other distinctive features of Austrian theory emerged, particularly the theory of knowledge laid out in the seminal contributions of Friedrich von Hayek (1937, 1945).

It was around this time that Ludwig von Mises set up his famous Privatseminar at his Chamber of Commerce offices in Vienna, which served as the true training ground of the third generation of the Austrian School.  Among the seminar participants, we find Friedrich von Hayek, Fritz Machlup, Oskar Morgenstern, Gottfried von Haberler and Paul Rosenstein-Rodan.  The main topic of the discussion group was not the Socialist debate ("there was no one there to convince", as one participant put it later), but rather interdisciplinary issues in social science and methodology, thus the inclusion in this group of the philosopher Felix Kaufmann and sociologist Alfred Schütz.

A new issue emerged with urgency in the 1920s, particularly after the Great Crash of 1929: the development of a subjectivist theory of macroeconomic fluctuations. This had been missing in earlier Austrian theory, but Knut Wicksell, who had imported so much from Austria for his capital theory reciprocated by exporting his own monetary macroeconomics to the Austrians.  The Austrian take on the theory of money and cycles had been initiated by von Mises (1912), and the possibility of an Austrian "macroeconomics" had dominated the research efforts of Morgenstern, Machlup and Haberler. 

The Austrian theory took its more definitively Wicksellian "monetary overinvestment" form with the formidable construction of Friedrich von Hayek (1928, 1931, 1933).  Hayek's macroeconomic theory had substantial consequences for Austrian economics.   Firstly, by its employment of the Böhm-Bawerkian theory of capital, Hayek reignited a long-simmering debate that had been running between the Austrians and the other Neoclassicals, now with the fiery Frank H. Knight (1933-36) taking up the anti-Austrian banner.  

Secondly, his theory led him to be lured by the sympathetic Lionel Robbins to the London School of Economics in 1931, which was to become a conduit for Austrian concepts to spread throughout the Anglo-American world, notably in the hands of Hayek's younger colleagues and students, such as John Hicks, Nicholas Kaldor, Abba Lerner, George L.S. Shackle and Ludwig Lachmann.  

Thirdly, the prominence of Hayek's theory brought him, the Austrian School and the L.S.E. directly into confrontation with Cambridge and John Maynard Keynes, an opposition that was made even more acute after Keynes's General Theory (1936).  However, the L.S.E.-Cambridge debate resolved itself in Keynes's favor, at least professionally-speaking, particularly after his own students abandoned him and went on to forge the very Keynesian Revolution he opposed.  Hayek's remarkable 1941 effort to restate the Austrian theory of capital and macrofluctuations fell on deaf ears in the economics world.

The Austrian "de-institutionalization", Schumpeter's abandonment, Hayek's departure for the L.S.E., and the abrasive debates with other schools exhausted the Austrians by the 1930s, but the final misfortune came with the ascent of the Nazis and the Anschluss of Austria with Germany, which led to the dispersal of the remaining members of the Austrian School: Mises went to New York University, Morgenstern to Princeton, Machlup to Buffalo, Rosenstein-Rodan to M.I.T., Haberler to Harvard, and both Kaufman and Schütz to the New School.  

Thereafter, the research efforts of the individual Austrian School economists began to deviate from each other as well as from the Austrian core.  Machlup proceeded with studies in methodology and knowledge in an Austrian vein, but in his work on monopoly and international monetary economics suggests that he had arranged a modus vivendi with the Anglo-American establishment.  Haberler had an even more intimate embrace with his hosts: his Austrian School background could barely be heard in his work, which was soon tinged with the Marshallian tones of the Chicago School. Morgenstern, always an outsider, took off on a bold new adventure beyond anything his old Vienna professors had anticipated: in collaboration with John von Neumann, he took the Austrian disaffection with Walrasian theory to a new extreme, creating the brand new field of Game Theory in the process.  

The old lions, Ludwig von Mises and Friedrich von Hayek, had a more difficult adjustment.  Hayek became a lonely, peripatic scholar, living in interdisciplinary space in London, Chicago and Freiburg, away from the main economic debates and pursuing his own brand of surprisingly novel research and pathbreaking contributions still in the Austrian vein.  His surprising 1976 Nobel prize and the surge of interest in his work after that, vindicated his painful post-1940s career.

Ludwig von Mises attempted to relive his glorious Vienna days by setting up yet another private seminar in New York City. Out of this, he managed to forge still another generation of Austrian economists - the fourth or "American" generation - which included such figures as Murray N. Rothbard and  Israel Kirzner.  Mises's  American offspring remained outside the economics mainstream and were coralled into a handful of universities, such as N.Y.U. and George Mason, where many of them are still concentrated today. 

The emphasis of the American Austrian school is, as can be expected, on Misesian themes, particularly that of the "market process" (versus equilibrium), developed by Mises (1949), although many of the Hayekian themes on information and self-organization fit in quite well.  The "market process" theory can be regarded as a form of evolutionary theory.  The Austrian theory of capital was maintained almost singlehandedly since the 1940s by Ludwig Lachmann, but was given an invigorating shot in the arm by the formidable effort of John Hicks (1973).   Many other Austrian concepts, such as the monetary overinvestment theory of cycles, were never really taken up again.  Perhaps surprisingly, the Monetarist Counter-Revolution in macroeconomics, which buried the Keynesian orthodoxy and resurrected some of the old Austrian policy positions, did not embrace and was not embraced by the American Austrians.  In spite of the fact that many insights of the Austrian School have made their way into Neoclassical mainstream economics, in spite of the fall of the Keynesians, the Austrian School still retains its distinctive flavor in modern economics. 

The Founder

The First Generation of the Austrian School

The Second Generation of the Austrian School

The Third Generation of the Austrian School

Early Foreign Associates of the Austrian School

The Fourth (American) Generation of Austrian Theorists

Resources on Austrian Economics


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